Secrecy act has banks on edge

[FaGal]

Secrecy act has banks on edge
www.sun-sentinel.com - By Kathy Bushouse - Business Writer - April 3, 2005

Disclosure rules can be complicated


The federal Bank Secrecy Act has been around for years. But these days, bankers are feeling the heat to comply with its rules.

Congress strengthened the anti-money laundering act in the wake of the Sept. 11 attacks and regulators stepped up enforcement. That has turned many bankers into detectives attempting to sniff out suspicious financial transactions that may point to terrorist activities or networks.

Two recent multimillion-dollar fines drive home the cost of noncompliance: In January, Riggs Bank in Washington, D.C., reached a plea agreement on criminal charges of violating the act, agreeing to a $16 million fine. Also last year, Birmingham, Ala.-based AmSouth Bank struck a $50 million settlement of alleged Bank Secrecy Act violations.

As the regulatory hammer descends, bankers complain they are unsure about the rules they're supposed to follow and unclear about what the government considers suspicious activity. South Florida banks are especially watching enforcement actions nervously. The region can be "a particular land mine" because of the flow of foreign dollars in and out of financial institutions, said Parker Thomson, managing partner of the Miami office of the law firm of Hogan & Hartson.

Fort Lauderdale's BankAtlantic reported in its 2004 third-quarter earnings that it addressed Bank Secrecy Act compliance because regulators identified problems. To date, BankAtlantic has not been officially cited nor fined for problems.

More than a half-dozen banks contacted for this story declined to comment about steps they are taking to ensure compliance, or about the burden of the act, in terms of money and time.

But away from the public eye, banks are scurrying to tighten procedures.

"Right now the compliance officer is probably one of the hottest officers in the bank," said Joaquin Urquiola, a manager with Goldstein Schechter Price Lucas Horwitz & Co., a Coral Gables accounting and consulting firm. Urquiola has audited many banks and advised them on compliance with the Bank Secrecy Act, and business is picking up.

A bank's compliance program depends on such factors as size, what kind of business they specialize in and their clientele, Thomson said.

Responsibilities include filing suspicious activity reports or reports for cash transactions over $10,000, for example, and following "Know Your Customer" rules that require banks to learn as much as possible about their clients and verify the information they've been given.

But many in the industry complain they aren't getting the guidance they need for their role in the war against terrorism.

Among their issues: What is suspicious activity and when should it be reported? What types of high-risk clients should banks avoid? As it is, some bankers are concerned that they may be filing too many reports of suspicious activity to show they are meeting the law.

Bankers want assurance that the information they're providing is useful to law enforcement officials, said John Hall, a spokesman for the American Bankers Association. "In some regard, we all want to avoid a cry-wolf mentality of just banks filling out more and more and more reports, and it not turning up anything," he said.

Exposed as vulnerable

The Bank Secrecy Act is nothing new to bankers. It was first approved in 1970 to detect money-laundering schemes. The act got an overhaul after Congress passed the USA Patriot Act in 2001 in response to the Sept. 11 attacks.

"I think what you had after Sept. 11, you had a heightened awareness ... of the potential vulnerability of the financial system," said Doug Greenburg, a partner in the Washington, D.C., office of the law firm Winston & Strawn. Greenburg investigated al-Qaida's finances and U.S. efforts against terrorist financing as a staff member of the 9-11 Commission.

For their part, federal regulators say they understand bankers' concerns about unclear guidelines and are working to educate financial institutions. Last month, William J. Fox, director of Treasury Department's Financial Crimes Enforcement Network, spoke at a Miami luncheon sponsored by the Florida Bankers Association and said he's talking with bankers in several states about their issues and will work to improve the system.

And Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, spoke to the Florida International Bankers Association in Miami and made similar promises of strengthening the working relationship between bankers and the government.

Said Stipano: "To be truly effective, we recognize there must be a greater flow of information from the law enforcement and intelligence community to banks and their regulators, or else we run the risk of turning the fight against money laundering and terrorist financing into a costly and ineffective `needle in a haystack' exercise."

Keeping closer tabs

In following the act, bankers need to rely partly on instinct. For example, Urquiola said it could be suspicious if a customer's regular deposits of a certain amount suddenly increase. "You need to know why that's happening," he said.

In its case, Riggs Bank was hit with a $25 million civil fine for failing to monitor and report millions in financial transactions in accounts controlled by Saudi diplomats. The FBI and other regulators had investigated those accounts for possible ties to terrorist groups.

Its criminal fine came on the heels of a Senate report released in July that showed Riggs Bank helped former Chilean dictator Augusto Pinochet and other foreign account holders hide millions of dollars.

As for AmSouth, the bank was fined for not filing suspicious activity reports on accounts held by two Memphis men who operated a Ponzi scheme.

Victims put money into promissory notes -- paying as much as 25 percent -- that were issued by one of the two fraudsters, according to a release announcing AmSouth's settlement with the U.S. Attorney of the Southern District of Mississippi, which investigated the case. "Although such a note is suspicious on its face, AmSouth did not question the terms or nature of any of these notes," investigators said.

The bank eventually filed a suspicious activity report, but investigators said it was nearly two years after the bank first detected the fraud scheme, and the report incorrectly characterized the activity as check fraud and understated the amount of money involved.

No cheap solution

Even if the rules of the Bank Secrecy Act aren't completely clear, one thing is certain: Compliance can be expensive. It cost at least $2 million for BankAtlantic to overhaul its system.

Alan Levan, chief executive officer of BankAtlantic, said the company added staff and beefed up technology. He said banks now have more responsibility to identify suspicious activity, to the point where they're almost acting like the police or FBI.

"Under the act, there's a no-tolerance level, so it's not good enough to get this 50 percent right or 90 percent right, or even 98 percent right," Levan said. "It literally has to be 100 percent."

One unintended consequence of the strengthened secrecy act: Smaller banks may find the rules so onerous that they may sell themselves to larger institutions, which can better manage the regulatory burden, Levan said.

With the Patriot Act rules and other regulations, "the cost of managing these new requirements is very expensive," Levan said. "It's just a changed landscape."

Kathy Bushouse can be reached at kbushouse@sun-sentinel.com or 954-356-4667.